The Case For A Rapid Economic Rebound In 2021
Summary
- Major stock indexes have set 32 record highs in 2021 so far. The market often looks six months ahead, so it sees a robust first half.
- Retail sales were up 5.3% MoM in January, after economists expected only 1.2% growth. Consumers are flush with cash, ready to spend when the coast is clear. The personal savings rate was 13.7% in December, almost double the 7.6% rate a year ago.
- Q4 2020 GDP was just upgraded to +4.1% (annualized and after inflation), and the Atlanta Fed's GDPNow real-time model sees +9.6% growth for Q1 2021, more than double its forecast of 4.5% on February 10.
By Gary Alexander
Until last Thursday, the stock market was practically shouting in our doubting ears: "There's a big recovery coming!" But we haven't believed it. We have doubted the market's rapid rise, saying it is "overbought" and clearly in a manic state, ripe for a correction. But maybe the market is right.
Major stock indexes have set 32 record highs in 2021 so far, including last Wednesday's 424-point surge in the Dow, breaching 32,000 at 1:45 pm before falling 1000 points Thursday and Friday. Even if that is the start of a much-needed breather, the market often looks six months ahead, so it sees a robust first half.
One analyst making such a case is Ethan Harris, an economist at Bank of America Global Research. In "Fasten your seatbelts - The case for a roaring economic recovery," Harris lists four ways in which this recovery should be faster than 2009, according to a summary by Yahoo Finance reporter Myles Udland:
- The stimulus in 2009 was late, small and faded too fast. Today's stimulus has been timely, huge and very persistent.
- In a COVID-19 world, much of the stimulus effect has been deferred until the economy reopens.
- The COVID-19 crisis should leave much smaller economic scars than the biggest banking and real estate crisis in modern history (in 2008).
- Household balance sheets were deeply damaged in the last cycle; they are in great shape today.
In addition, according to the Congressional Budget Office (CBO), the economy did not reach full employment after the 2008-09 recession until 2017 - almost eight years later, but Harris says, "This time we expect full employment by 3Q 2022, or nine quarters into the recovery. Fasten your seatbelts."
The year is already off to a torrid start. Retail sales were up 5.3% in January, month over month, after economists expected only 1.2% growth. Sales of existing homes rose 0.6% after economists polled by Reuters forecasted a 1.5% decline in January. The 12-month year-over-year sales total is +23.7% to 6.7 million units. The median price is up 14.8% y/y. The real estate market is extremely tight. At January's pace, it would take under two months to exhaust the current inventory (6-7 months is normal).
Fourth-quarter 2020 GDP was just upgraded to +4.1% (annualized and after inflation), and the Atlanta Fed's GDPNow real-time model sees +9.6% growth for the first quarter of 2021, more than double its forecast of 4.5% on February 10. Industrial production is up 17.4% since last April's low, and its manufacturing component is up 23.8% from the April low and down only 1% year over year. Industrial metals, particularly copper, are a key barometer of industrial recovery, and they are pointing sharply up.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Turning to stocks, corporations have become lean and mean (productive) with expanding profit margins. With nearly 90% of S&P 500 companies having reported their revenues and earnings for Q4-2020, sales have beaten expectations by 2.9% and earnings have beaten estimates by 17.3%. An amazing 81% of the reporting companies have delivered positive earnings surprises, and 75% have beaten revenue forecasts.
Consumers have paid off much of their debt and are flush with cash, ready to spend when the coast is clear. Economist Ed Yardeni reports that consumer credit is 118% lower y/y as of last December. The personal savings rate was 13.7% in December, almost double the 7.6% rate a year ago. Let's go shopping!
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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